Banks borrow over Rs 1 lakh cr via MSF on January 10 as liquidity turns tight

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Borrowing of banks through the Marginal Standing Facility (MSF) was over Rs 1 lakh crore on January 10 nearly two weeks after liquidity turned tight, as per Reserve Bank of India’s (RBI) data. Money market experts attribute this to the fading away of government spending and reduced infusion of liquidity by RBI.

Banks borrow funds from RBI’s MSF facility for overnight use when the interbank liquidity dries up. Currently, the MSF rate is 6.75 percent which is 25 basis points higher than the repo rate.

Data showed that banks borrowed Rs 1.03 lakh crore on January 10, which was the highest in the last two weeks. The borrowing was over Rs 1 lakh crore after December 26, when banks borrowed Rs 1.27 lakh crore via MSF.

“The effect of government spending fading away and reduced liquidity infusion by RBI again put pressure on the liquidity which took MSF borrowing to Rs 1 lakh crore,” said Mataprasad Pandey, Vice President, Arete Capital Service.

Further, Gaura Sen Gupta economist at IDFC First Bank said there were outflows related to excise duty payments, which would have added to system liquidity deficit.

Liquidity in the banking system has been tight for the last few months, which is prompting banks to borrow from the central bank via the MSF route.

Deficit liquidity in the banking system has narrowed since the start of this month due to month-end government spending on account of salaries and pensions. Currently, liquidity in the banking system is in deficit of around Rs 1.63 lakh crore.

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RBI’s support

To support the liquidity deficit, the central bank has conducted various variable rate repo auctions in December and so far in January. But that too did not help much to combat higher deficit liquidity.

After the bank borrowing crossed over Rs 1 lakh crore on January 10, the RBI announced the variable rate repo (VRR). This announcement was because of higher deficit liquidity and the reversal of the variable repo auction conducted by RBI on January 5.

“To address this tight liquidity situation RBI again announced VRR of Rs 1.75 lakh crore,” Pandey added.

Around Rs 1 lakh crore is scheduled for reversal on January 12. The central bank implemented a 13-day variable rate repo on January 12 through which it injected Rs 1.75 lakh crore liquidity in the banking system.

These funds will be reversed on January 25.

Adding to this, Gupta said, the 13-day VRR will limit the upward pressure on the weighted average call rate which currently remains near MSF.

“The longer tenor VRR which will mature on January 25, will cover Goods and Service Tax (GST) outflows which will take place on January 20. While the weighted average call rate could ease over the next few days, it is likely to pick up near the GST payment due date,” Gupta added.

Easing liquidity deficit

On January 4, Moneycontrol reported that the liquidity deficit in the banking system reduced sharply between December 27 and January 3, 2024, thanks to month-end government expenditures such as payment of salaries and pensions.

As per the Reserve Bank of India’s (RBI) data, the liquidity deficit has reduced by over Rs 1.43 lakh crore, as it fell from Rs 2.62 lakh crore on December 27, to Rs 1.19 lakh crore on January 3.

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Way ahead

Money market experts said higher borrowing by banks through MSF is likely to continue as liquidity is expected to remain tight.

“Liquidity conditions will remain tight in the near term as currency leakage tends to seasonally pick up in Q4FY24,” Gupta said.

Liquidity conditions are expected to ease in March when government spending kicks in and till then it is expected that RBI will continue with VRR auctions.